In 2009 three major developments dominated the Israeli political scene. The election of Benjamin Netanyahu to a second term as prime minister, a more vigorous U.S. Middle East peace policy, and the international fallout from Israel’s 22-day military operation in the Gaza Strip from late December 2008 to mid-January all had potentially far-reaching consequences.

Netanyahu’s victory in the February election was far from clear-cut. Although his right-wing Likud party won one seat fewer than former foreign minister Tzipi Livni’s centrist Kadima, the right-wing bloc of parties allied to Likud garnered a majority of 65 seats in the 120-member Knesset (parliament). This enabled Netanyahu to form a stable 74-member coalition composed of Likud (27 seats), right-wing Yisrael Beiteinu (15), three right-tending religious parties (Shas [11], Torah Judaism [5], and Jewish Home [3]), and, controversially, the centre-left Labour Party (13), whose leader, Ehud Barak, retained the defense portfolio and became one of Netanyahu’s closest confidants.

After taking office on March 31, Netanyahu distanced himself from the internationally accepted two-state model for peace with the Palestinians but, under heavy pressure from Washington, soon backtracked. In a major policy speech at Bar-Ilan University on June 14, he committed himself to an independent Palestinian state alongside Israel. “In my vision of peace, there are two free peoples living side by side in this small land, with good neighbourly relations and mutual respect, each with its flag, anthem, and government, with neither threatening its neighbour’s security and existence,” he declared. Netanyahu’s offer, however, was not unconditional: the Palestinian state would have to be demilitarized; the Palestinians would have to recognize Israel as a “Jewish state”; no Palestinian refugees would return to Israel-proper; and no part of Jerusalem—which would not be divided—would serve as the capital of the Palestinian state. The Palestinians, who had been offered far more by outgoing prime minister Ehud Olmert, were reluctant to engage on this basis and demanded that Netanyahu first freeze Jewish settlement construction in the West Bank as a sign of good faith.

In 2009 Pres. Barack Obama led a dynamic U.S. resolve to promote comprehensive Israeli-Arab peace, which he saw as the key to stability and the restoration of U.S. standing in the region. In a seminal speech at Cairo University on June 4, he set down conditions for the resumption of Israeli-Palestinian negotiations, including a freeze on the construction of Jewish settlements in the West Bank, and urged the Arab world to encourage peacemaking by taking initial steps toward normalization with Israel. But the mooted freeze-for-normalization deal failed to materialize, and in late October, after months of intensive shuttle diplomacy, special U.S. Middle East envoy George Mitchell acknowledged that little progress had been made.

Promising peace negotiations under the previous Israeli government had broken down in December 2008 when Israel launched a major military operation against the radical Hamas government in the Gaza Strip. Determined to put an end to eight years of Hamas rocketing of Israeli towns and villages in the Gaza periphery, the Israeli Defense Forces (IDF) struck with overwhelming power, first bombing Hamas military and government targets from the air and then sending in ground forces and using heavy fire to advance in booby-trapped urban areas.

According to Palestinian sources, 1,417 Palestinians, 926 of them noncombatants, were killed in the 22 days of fighting; Israel put the Palestinian death toll at 1,166 and claimed that at least 709 were militiamen. Although Hamas fighters launched hundreds of rocket attacks during the operation, Israel lost only 10 soldiers and 3 civilians.

The disparity between the death tolls and the widespread destruction in Gaza led to claims that the IDF’s response had been disproportionate and indiscriminate. Israel argued that its soldiers, faced with the problem of fighting militants who were embedded in heavily populated urban areas and deliberately using civilians as human shields, had operated strictly within the laws of war and had made strenuous efforts to warn civilians to move out of harm’s way before impending attacks.

In early April the UN Human Rights Council established a fact-finding commission under South African judge Richard Goldstone to investigate violations of human rights and humanitarian law in the Gaza fighting. The commission heard testimony mainly from Palestinians, as Israel—charging that the commission’s mandate was inherently biased—refused to cooperate. On September 15 the commission issued a 575-page report stating that it had found evidence that international human rights and humanitarian law had been seriously violated. It also concluded that Israel had “committed actions amounting to war crimes, and possibly crimes against humanity.”

Netanyahu accused the commission of having applied “twisted standards” and of having played into the hands of radicals who hoped to defeat Israel by delegitimizing it on the international stage. He warned that if Israel was denied the right to defend itself against future rocket attacks, it would not be able to take risks for peace. The U.S. characterized the Goldstone report as biased and deeply flawed, but it urged Israel to conduct an independent investigation of its own, partly as a means of removing the report from the international agenda and paving the way for renewed Israeli-Palestinian peacemaking.

Although the Gaza operation hurt Israel’s international image, it also seemed to establish a strong deterrent balance, at least in the short term. Nine months after the war, there was virtually no rocket fire from Gaza. Behind the scenes Israel and Hamas—through German mediation—were negotiating a deal for the release of Gilad Shalit, the Israeli soldier held prisoner by Hamas militants since June 2006.

Although both Hamas and Hezbollah used the lull to build up huge rocket arsenals, Israeli leaders were far more concerned by the strategic threat posed by Iran. Addressing the UN General Assembly on September 24, Netanyahu urged the international community to prevent the “tyrants of Tehran” from acquiring nuclear weapons. In late October Barak expressed Israel’s concern that Iran would exploit talks with the Western powers to gain time while continuing to pursue a clandestine nuclear weapons drive.

Nevertheless, despite differences over the efficacy of diplomacy with Iran, Israel and the U.S. continued to coordinate defensive measures in the event of a military showdown with Tehran. In the Negev desert in late October, in by far the largest and most sophisticated joint exercise of its kind, the IDF, the U.S. European Command, and the U.S. Missile Defense Agency tested the interoperability of four state-of-the-art defense systems against incoming ballistic missiles: the U.S. high-altitude THAAD, the ship-based Aegis, the lower-altitude Patriot (PAC-3), and the Israeli high-altitude Arrow 2.

On the economic front, 2009 saw Israel emerging from the global economic crisis relatively unscathed. The government passed a two-year budget with increased spending to counteract growing unemployment, and the Bank of Israel lowered interest rates to encourage business activity. By the beginning of the fourth quarter, Israel seemed to have turned the corner. The Tel Aviv Stock Exchange had gained more than 60% over the lows of December 2008; the Composite State-of-the-Economy Index had risen for a fourth consecutive month; and the Bank of Israel was optimistically forecasting growth of 3% for 2010. Nevertheless, there were two main concerns: a weak U.S. dollar was hurting Israeli exports, and the national debt-to-GNP ratio for the end of 2009 was projected to top 84%.